Investors flock to european stocks as ‘hedge america’ trade builds

Friday 20 February 2026 - 14:50

Investors are channeling unprecedented sums into European equities as they look to balance portfolios that had become heavily tilted toward the United States and its richly valued technology sector. Fund flow data show European stock funds have logged back-to-back weeks of record inflows in February, with tens of billions of dollars pouring into the region even as U.S. equity funds slip into modest outflows. The shift reflects a growing willingness among global asset managers to use Europe as a way to dilute exposure to expensive American benchmarks rather than as a wholesale bet against the U.S. economy.

This repositioning has taken shape in what some managers now call the "hedge America" trade, an approach that trims dependence on Wall Street without abandoning it entirely. Instead of aggressively selling U.S. shares, large investors are directing new money into cheaper markets abroad, with Europe emerging as a primary destination alongside select emerging economies. Bank of America data indicate that U.S. stocks are capturing a shrinking share of worldwide equity inflows compared with previous years, even as overall allocations to global equities continue to rise. The result is a gradual rebalancing in which European bourses absorb a larger slice of new capital while American indices lose some of their dominance in cross-border portfolios.

The rotation has been reinforced by performance. The Stoxx Europe 600 index has climbed to record territory around the 630-point mark this month, extending a strong run that has seen European benchmarks outperform the S&P 500 over the past year in both local-currency and dollar terms. That outperformance has coincided with a softer U.S. dollar, which has amplified euro-area gains for international investors and improved the appeal of European assets in global multi-asset allocations. At the same time, U.S. indices, dominated by a narrow group of mega-cap technology and artificial intelligence leaders, have delivered flatter returns more recently amid debate over how much future growth is already priced in.

A powerful valuation gap underpins the move. European equities are trading at roughly 14 times forward earnings, compared with about 22 times for the U.S. market, one of the widest discounts in a quarter century by some estimates. Years of underperformance and persistent skepticism have left many European blue chips priced at a significant markdown to American peers despite comparable global revenue exposure in sectors such as healthcare, industrials and consumer goods. Strategists argue that this lower starting point gives Europe more room to surprise on the upside if earnings prove resilient, while richly valued U.S. stocks face a thinner margin for error should growth disappoint.

Sentiment toward Europe has also shifted sharply. In a recent survey of asset managers by Bank of America, a record share of respondents said they expect European growth to accelerate, citing expansive fiscal policy in Germany and rising defense and infrastructure spending across the region as key catalysts. Many respondents said stimulus in Europe’s largest economy is finally feeding through to macroeconomic data, encouraging investors who had viewed the bloc as structurally sluggish. By contrast, a sizable portion of those surveyed projected that growth in the United States and China would flatten in the coming months, reinforcing the case for diversifying away from U.S. benchmarks that have led global markets for more than a decade.

Even so, there are warnings that the rally may not be one-way. A group of strategists polled by major financial outlets recently suggested that the Stoxx 600’s latest record may leave limited room for further gains this year, given the scale of the rebound and lingering geopolitical and policy risks. Analysts at large investment banks have also highlighted that concerns over artificial intelligence disruption, once concentrated in the U.S. tech complex, are now increasingly applied to European sectors such as media, financial services and industrials. Those risks add a layer of uncertainty to earnings forecasts and could inject volatility into a market that has benefited from sustained inflows after years of being under-owned.

Despite those caveats, the structural case for allocating more capital to Europe remains intact for many global investors. After a prolonged stretch marked by persistent outflows, European equity funds have spent more than a year in positive territory, suggesting a durable change in how the region fits into global portfolios. For allocators who spent the past decade debating whether to expand beyond the U.S., the discussion is increasingly turning to how far to lean into the trade and how best to calibrate exposure between American growth stories and Europe’s discounted, income-rich markets. The "hedge America" playbook, built around moderation rather than wholesale retreat, has become a central theme in that rebalancing.